Small Cap Value Report (4 Jun) - NRR, SRT, VP.,

Good morning. One hundred and thirty two minutes late, defective junction box at New Malden. I do apologise for being late, this was not due to faulty railway infrastructure, but rather due to over-indulgence at the Pub after another excellent meet the management function yesterday at FinnCap.

A large group of us met three companies, and I was highly impressed with management at Newriver Retail (LON:NRR) . As a former retailing FD, I know my way around property leases, and these guys really do know what they're doing. If one can take a long term approach, then in my opinion New River shares are as close as you can come to a sure fire winner. Management have been there amp; done it before, so you have a CEO with 30 years property experience, and for a relatively small portfolio of property assets they are working flat-out to add value to.

To be brutally honest, I despise many people in the Listed property sector - all too often they are greedy, arrogant people of dubious ability, who think they have some God-given right to enormous salaries amp; bonuses, when what they actually do is just float to the top in bull markets, adopt fake posh accents, and rip off their investors (more fool them!). Gravel-voiced b***-shitters, as a mate of mine describes that type - in fact they are not confined to the property sector, think of 50%+ of all Listed company Chairmen, and you'll be bang on the money. Dreadful.

In contrast, New River is a class act. You've got a CEO who's been there amp; done it before. More importantly, he can read the cycle, and his whole presentation yesterday was music to my ears - all based on Buffett principles of value. He sold his last property company at the top of the cycle, and set up New River at the bottom of the cycle - and he's in it for the right reason - because he loves doing it! They are buying retail properties on yields of about 9%, borrowing money at about 4%, so the economics of it are blindingly simple.

They've got every risk covered, and being a REIT are obliged to pay out 90% of earnings as dividends. That is a great way of capping management remuneration too. There is about 50p of unrealised property development upside not yet baked into the NAV, so in reality NAV should gradually rise to around 300p, and it should pay a sustainable dividend of about 8%. What's not to like at a share price of 219p? I have a buy order in the market as we speak.

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In my opinion NRR should not be trading at a discount to NAV, if anything it should probably be at a modest premium, to reflect management track record. Hence there could be about 20-30% upside from a re-rating, and you get paid about 8% p.a. in dividend yield whilst you wait. It's not for short term people, but as a long-term story it looks like a 50% overall potential gain sitting on a plate to me.

Software Radio Technology (LON:SRT) issues results for the year ended 31 Mar 2013. Turnover has risen strongly from £6.2m to £10.0m, and operating profit has risen from £153k last year to £1,178k this year - pretty impressive. Although at £35m market cap last night (at 30p per share) good performance seems to be already priced-in,

They've also got an excellent Balance Sheet, with £8.4m in current assets, and only £1.4m in total liabilities.

Despite this, I always feel uneasy when looking at SRT. They have an erratic track record, and I question the quality of management - in the past rash promises have been made to investors, culminating in a serious profits warning a while ago. I don't lilke the tone of the narrative today, which just sounds a bit rampy - perhaps a pattern of over-promising is in evidence here?

Also, I don't like the outlook statement. They say;

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... our major challenge is accurately forecasting customer demand and order inflow remains unpredictable. In common with the year under review, our expectations are that the current financial year will be weighted towards the second half.

If that's not a veiled profits warning, I don't know what is! If I owned these shares yesterday, I would have sold this morning. On the basis of these figures, and the uncertain outlook, I reckon the shares are probably priced at more than double the valuation I would be prepared to pay.

It's also worth bearing in mind that pre-tax profit of £1.2m grows to earnings of £1.5m due to a £0.3m tax credit - therefore EPS is boosted accordingly. So EPS of 1.3p is really 1.0p of trading profit. Which makes the share price of 28p look stretched - i.e. the price already factors in a doubling of profit, on a sustainable basis - but how likely is that to happen? I cannot see the attraction of taking that risk amp; paying up-front for future out-performance.

Equipment rental company VP (LON:VP.) really is a class act. Their results for the year ended 31 Mar 2013 are issued this morning, and defy the gloomy economic backdrop that we constantly hear about on the News. Basic EPS has risen 15% to 35p, and the total divis are up 8% to 12.25p. So at 355p the shares still look good value despite having been in a long up-trend. A PER of 10 seems reasonable for a business that clearly has a strong position in niche markets. There is some debt, as you would expect with an equipment hire company, and I never know quite how to treat debt with this type of company. Should one add it onto the market cap and look at enterprise value? Or should one just regard debt as a necessary way of funding the assets, and only consider the interest cost in earnings? Tricky one, and I genuinely don't know the right answer here. Views?

A fairly short report today, as there is nothing else of interest to me from today's announcements. Results from Sepura (LON:SEPU) look good, but the share price seems fully valued, as if the case with many companies at the moment. I wouldn't say the market is necessarily over-valued, but it's difficult to see much upside for many companies. Personally I just won't pay a PER of 20 or more for anything. It only takes one slightly wobbly trading statement, and you've instantly lost 30-50% of your money - why take that risk?

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Regards, Paul.

(of the shares mentioned today, Paul has no long or short positions, although his broker is currently trying to buy shares in NRR!)